1.Consider the following 3x6 FRA Assume the buyer of the FRA agrees to a contract rate of 4.87%on a notional amount of 25 million USD Calculate the upfront settlement amount of the'buyer if the settlement rate is 4.37%.Assume a 30/360 day count basis.

 

　　A.-31,250

 

　　B.-30,912

 

　　C.+31,250

 

　　D.+31,912'

 

　　Answer:B.

 

　　The buyer of an FRA agrees to pay fixed.Since rates are now lower than the contract rate,this contract must show a loss for the buyer.The loss is$25,000,000 x(4.87%-4.37%)x(90/360)=$31250,when paid in arrears(i.e.,in 6 months).On the settlement date(i.e.,brought forward by 3 months),the loss is$31250/(1+4.37%x 0.25)=.$30912.

 

　　2.What are the differences between Forward Rate Agreements(FRAs)and Eurodollar Futures?

 

　　I FRAs are traded on an exchange while Eurodollar Futures are not.

 

　　II FRAs have better liquidity than Eurodollar Futures.

 

　　II FRAs have standard contract sizes while Eurodollar Futures do not.

 

　　A.I only

 

　　B.I and II only

 

　　C.II and III only

 

　　D.None of the above

 

　　Answer:D

 

　　Eurodollar futures contracts are highly liquid,exchange traded contracts on short term interest rates with standardized contract sizes and terms.FRAs are traded over-the-counter.

 

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